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Qantas: Defending Its Rich U.S.-Australia Route

When Australia-based Qantas Airways launched its first superjumbo Airbus A380 flight last fall, it boasted in advertising campaigns that "it's not the size of the plane; it's what you do with it." Qantas will soon begin learning whether its strategy for retaining control of the lucrative U.S.-Australia route can stand up to that claim. It faces unprecedented competition for a route that is among the most profitable for long-haul business travel in the world, with Qantas routinely charging some $18,000 for a round-trip business-class fare.

In a research note issued late last month, Macquarie Bank predicted the launch of new service from Virgin Australia and Delta Air Lines (DAL) will lead to a trans-Pacific discount war. Delta plans to start competing daily flights between Los Angeles and Sydney on July 1.

A fare war—V Australia is selling round-trip tickets for less than $800, including fees and taxes, vs. Qantas' $1,000 economy-class fare—could not come at a worse time for any of the airlines involved. The International Air Transport Assn., the world trade body for airlines, expects travel to plummet in the Asia-Pacific and U.S. markets. "The circumstances [for the industry] are likely to remain very tough for at least 12 months," Matt Crowe, an analyst at JPMorgan Chase (JPM), wrote in a Feb. 5 note to clients. "We do not expect to see a significant improvement in corporate travel budgets in that time frame."

Fierce Fight

Despite the pessimism, none of the airlines is blinking. The fierce fight that's brewing will be for control of whatever dollars are spent on a nonstop route that Qantas has dominated for decades, with only token opposition from United Airlines (UAUA). V Australia, Virgin Group's new Australia-based international offshoot, showed off its first Boeing (BA) 777 in Los Angeles on Feb. 6, with the first flights from Sydney to L.A. starting Feb. 27. Daily service is slated for Mar. 20. "We welcome the opportunity to be a catalyst for increased competition on a route that has long been dominated by just two carriers," says Brett Godfrey, CEO and co-founder of the Virgin Blue group of airlines.

Delta this summer is joining United in offering nonstop service from Los Angeles and San Francisco to Sydney and Melbourne. "We will be competitive on product and are always competitive on price," says Delta spokeswoman Betsy Talton. Virgin Chairman Sir Richard Branson also has signaled that the carrier is prepared to bring on a bruising price war to win its share of the business and leisure travel on the trans-Pacific route. "Our philosophy is never to go out with an empty seat," Branson told reporters when announcing Virgin would add seven new 777s to its fleet to take on Qantas' A380s and older 747s.

United executives said on a recent earnings call that they do not plan to cede the market to new entrants or to Qantas. United reported a double-digit decline in premium ticket purchases year-over-year. It also posted a 20% drop in unit revenues to Australia in particular, as more business customers fled or traded down to coach seats.

Each airline is relying on partnerships to feed customers to East Coast departures in Australia and the U.S. departure cities of Los Angeles and San Francisco. Delta, which became the world's largest airline following its merger with Northwest Airlines, announced in November it would co-market flights with Alaska Airlines (ALK), which has a strong presence in the West.

Domestic Competitor

Virgin, which operates the Australian domestic carrier Virgin Blue and has become a strong competitor to Qantas for low-fare travel in the country, is counting on its expanding U.S. and Atlantic routes to give passengers the same experience across continents, executives say. Virgin offers satellite service on some planes, mood lighting, bars in some long-haul flights, and touchscreen entertainment systems. Analysts have questioned whether it has enough cash to withstand a battle that could last at least three years before Virgin breaks even on the new planes and startup costs. Branson's Virgin Group also holds a 25% stake in Virgin America, which reported extremely weak financial results last week.

Amid similar fears that the travel slump and increased competition will crimp fares, Qantas shares tumbled to a 12-year low on Feb. 4. The airline reported a 66% decline in first-quarter profits and announced plans to issue new shares to build its balance sheet. The carrier is counting on its reputation to weather the turmoil. It has long relied on its partnership with American Airlines (AMR) in the Oneworld alliance to funnel passengers to its U.S. departure cities, while maintaining a virtual stranglehold on business travel within Australia.

The airline continues to believe its A380s will be the linchpin of a massive customer service upgrade plan. Qantas recently took delivery of the second of 20 planes it has ordered from Airbus. Emirates Airlines and Singapore Airlines were the first to receive A380s, but Qantas is the only carrier operating one on the Australia-U.S. route. "The harder the times, the more important you have to focus on the service and product," says John Borghetti, Qantas' executive general manager. "It isn't all about the interior of an aircraft but rather the whole customer experience."

PJ's and Beds

For many customers, the choice of airline may come down to the level of service offered on each plane. The A380 can carry 100 more passengers than the Boeing 777s that Delta and Virgin plan to use. The airlines are hiring big-name designers and chefs to outfit and equip the planes, and each is touting lie-flat beds for business travelers.

Qantas configured the entire upper deck of its A380s to deliver premium service. The 72-seat business class comes equipped with privacy screens, a front lounge, and overnight pajamas. Qantas also inaugurated a premium international economy class. It sells 32 seats there for as much as $5,000 each round-trip. That's five times the price of regular economy service on the lower deck, but includes better seats, priority service, and food bars for passengers to grab their own drinks and snacks.

Qantas also has the best in-country route network in Australia and amenities others cannot match, Borghetti says. The airline recently spent millions to upgrade its first-class and business lounges in Sydney and Melbourne, offering free massages, made-to-order hot meals, and valet service. And it emphasizes its ability to arrange excursions such as hot-air balloon rides or winery tours through its various partnerships with Australian tourism bureaus and companies. "Thanks to good strategy, we've done a lot of the investments already that others are only just now beginning to realize they must make," Borghetti says.

With the trans-Pacific skies getting more crowded, competition on the route may turn into a dogfight— and rival airlines could end up reporting severe turbulence on their balance sheets.